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FOMC statement reinforces expectations for a rate hike in mid-2015 - BTMU

FXStreet (Łódź) - Lee Hardman, FX Analyst at the Bank of Tokyo Mitsubishi UFJ comments on yesterday's Fed monetary policy announcement which in his opinion suggests that interest rates should start rising in the middle of next year.

Key Quotes

"The US dollar has continued to strengthen modestly in the Asian trading session following the release overnight of the less dovish than expected FOMC statement. The Fed has signalled that it will end QE3 this month after judging that there has been a 'substantial improvement in the outlook for the labour market', and that it continues to see 'sufficient underlying strength in the broader economy to support the ongoing progress toward maximum employment in a context of price stability'."

"The Fed acknowledged the recent improvement in labour market conditions by stating that there has been 'solid job gains and a lower unemployment rate'. The Fed also more notably acknowledged that the 'underutilization of labour resources is gradually diminishing' which replaced their prior description that there 'remains significant underutilization of labour resources'."

"The shift to tighter monetary policy is likely to remain gradual. The Fed maintained their commitment to keep rates low for a 'considerable time' after QE ends, although it has more clearly made the commitment more data dependent by adding that incoming information on employment and inflation could bring forward or delay monetary tightening."

"As a result the US dollar is likely to become more sensitive to upcoming economic data releases going forward. The Fed does not appear overly concerned by heightened downside risks to inflation from a stronger US dollar and lower energy prices stating that 'although inflation in the near-term will likely be held down by lower energy prices and other factors, the Committee still judges that the likelihood of inflation running persistently below 2% has diminished somewhat since early this year'. However, the Fed did acknowledge that 'market-based measures of inflation compensation have declined somewhat' signalling some concern which represents the most dovish addition to the statement."

"Overall the FOMC statement appears consistent with our view that the Fed will begin to raise rates from the middle of next year. The reaction in the US fixed income market has been fairly limited, with the implied yield on the December 2015 Fed fund futures contract rising only modestly by around 7 basis points to 0.53%."

"Investors remain comfortable that the Fed will not begin to raise rates until later in 2015. The US dollar should now continue to trade on a stronger footing in the near-term."

"The release next week of a strong non-farm payrolls report for October could provide the trigger for further US dollar gains. We do not expect the US dollar to derive additional upward momentum from the release today of the US GDP report for Q3. The report is expected to reveal that growth slowed in Q3, although the US economy still appears to be holding up relatively well compared to slowing growth overseas."

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